D.Byrne, D.Sichel: The productivity slowdown is even more puzzling than you think

If the tech sector continues to innovate so rapidly, why has overall productivity growth been exceptionally sluggish? David Byrne, Senior Economist, Federal Reserve Board of Governors, and Dan Sichel, Professor of Economics, Wellesley College ask in an article published on the voxeu.org portal.

The growth in labour productivity – real output per hour worked – in the US slowed markedly around 2004. During the previous ten years, labour productivity in the business sector had risen at an annual average pace of more than 3%. Productivity received a boost from innovations in the production of digital information and communications technologies (ICT) and the spreading use of ICT across all sectors of the economy. Despite the apparent continuation of the digital revolution, productivity growth slowed to about 2% a year during 2004-2010 and then dropped to a paltry pace near just 0.5% during 2010-2016. Outside the US, labour productivity growth also declined in other advanced market economies.

If sustained, this sluggish pace would have dire consequences for future gains in living standards. Over long spans of time, increases in labour productivity are the fuel that boosts living standards and the main reason that material well-being is significantly higher today than 50 or 100 years ago. At a 2% pace, labour productivity would double every 35 years, while at a 0.5% pace, that doubling would take almost 140 years, the authors write.

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So if the tech sector continues to innovate so rapidly, why has overall productivity growth been exceptionally sluggish?, the authors ask. While it is possible that the challenges inherent in measuring output outside the ICT sector have suddenly worsened, we suspect that the answer depends importantly on the long lags necessary for innovations to diffuse through the economy and move the needle on overall productivity. This pattern of slow diffusion has been seen in the past both with electrification in the late 19th and early 20th centuries, as well as for semiconductors in the second half of the 20th century.

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